As you can see even Spain which was criticised for acting slowly in fact was 3/4 years ahead of Italy we note that the Italian problem got worse during this period. In fact Spain is in the process of repaying the ESM ( European Stability Mechanism) the money it borrowed for this.

Spain made the request for the repayment on 30 January 2018. One repayment will be for €2 billion, and is planned for 23 February 2018. The size of the second repayment will be €3 billion, and is scheduled for May 2018.

So in total this has happened.

Between December 2012 and February 2013, the ESM disbursed €41.3 billion to the Spanish government for the recapitalisation of the country’s banking sector……….Following the two repayments, Spain’s outstanding debt to the ESM will stand at €26.7 billion.

So Spain is exiting the procedure as Italy begins it and as is so usual Italy is doing it in its own way. For example in the tweet picture above the phrase bail in is used when in fact what it has done have had the features of bailouts as well. Also is this good or simply kicking the can somewhere else?

Investors also snapped up more than 100 billion euros ($123 billion) in non-performing Italian bank loans last year, which has helped reduce the level of net bad debt across the sector by more than a third.

Some may think that this may be more like vultures on their prey.

This month, Bob Diamond and Corrado Passera, the former bosses of Barclays Plc and Intesa Sanpaolo SpA, joined forces to shop for a lender to smaller Italian companies.

Monte Paschi

It too was in the news yesterday as Bloomberg told us this.

Fabrizio Pagani, the chief of staff at Italy’s Ministry of Economy and Finance, told Bloomberg News that Monte Paschi is in the picture for mergers after taking substantial steps to clean up its balance sheet since its rescue and introduce new management practices.

Who wants to merge with a zombie? I am reminded of what my late father used to tell me which is that more than a few takeovers and mergers only exist because the muddle the figures for a year or to. I can see why the Italian state might be keen as they did this.

A sale of Monte Paschi would cap a saga that saw Italy’s third-biggest bank, an icon of national finance, become engulfed by bad debts, criminal cases, and 6.7 billion euros in losses in the last two years. The government salvaged it as part of a 8.3 billion-euro recapitalization that strained ties between the country and the European Union over bailout rules.

Italy paid some 6.49 Euros a share as opposed to the 3.18 as I type this as we mull how the “substantial steps” have been ignored by the market which has more than halved the share price? We also learnt something from its bond issue in January. From the Financial Times.

Despite the low rating, the bond sale was three times subscribed and priced at a yield of just 5.375 per cent, confirming Monte Paschi’s ability to tap markets after its 2017 recapitalisation,

“Just 5.375%”? As in Europe these days that feels like riches beyond imagination! Especially if you note this.

The Italian government will provide a guarantee to the investment grade rated senior notes in this securitisation, which Monte Paschi will “retain” on its books.

I also thought that the bailout fund Atlante was pretty much out of cash.

It is able to derecognise the non-performing loans, however, because the riskier “mezzanine” and junior notes are being sold to the Italian Recovery Fund………..
While this fund — formerly known as Atlante — is private, it is part of a government-led initiative to clean up the Italian banking sector, and has far lower return targets than typical distressed debt buyers.

Anyway the share price reflects something rather different from the rhetoric as I note that according to Il Populista our old friend Finance Minister Padoan is on the case again.

The state will remain in Mps “for a few years”. Economy Minister Pier Carlo Padoan told the unions to add that “giving a number would be wrong and counterproductive for the markets”.

Giving wrong numbers has never bothered him before as I note this description of him which may be a quirk of Google translate.

The Minister of Economy, without shame,

The ECB

Today has brought news that swings both ways for the Italian banks as we have got the data which determines the interest-rate for TLTRO II so it was not a surprise to see this.

The annual growth rate of adjusted loans to non-financial corporations increased to 3.4% in January, from 3.1% in December.

Of the new 24 billion Euros some 20 billion was for less than a year but presumably long enough to fulfil the ECB criteria with the Italian banks to the fore.

January net lending flows to the non-financial private sector were particularly strong in Germany and Italy (second largest in over 10 years). ( @fwred )

Yet so far they have gained little as the annual gain from this according to @fwred is 769 million Euros for the Spanish banks but 0 for the Italian ( Portuguese and Dutch) ones. Perhaps the last-minute dash will make a difference.

Veneto Banks

The collapse of Veneto Banca and Banca Popolare di Vicenza. last year led to many financial problems in the area. In banking terms this happened.

The two Veneto banks were wound down in June, with the state guaranteeing losses of up to €17bn, after the European Central Bank declared the lenders as failing. Intesa was handed as much as €4.8bn to help preserve its capital ratios from any adverse impact from the deal. ( FT)

Yet as this from IlFattoQuotidiano.it in January shows the pain for many businesses and savers continues.

He finally gave up. But it took six hours of negotiation because the former Romanian bricklayer Marin Halarambie, 59, agreed to move his car from the entrance of the historic Veneto Banca headquarters in Montebelluna. Christmas Day had arrived to stage a very personal protest, as the bankruptcy of the bank cost him a loss of about 125 thousand euros.

Comment

This is a particularly Italian saga where official boasting about the lack of bank bailouts met a brick wall of bank collapses later. Even worse the problem deteriorated as they looked the other way. On this road equity investors suffered – who can forget Prime Minister Renzi telling people Monte Paschi was a good investment ? – and so did the savers who were encouraged to invest in the “safe” bank bonds.

Now the economic outlook is better we wait to see what happens next. But there is a clear distinction between my subject of yesterday the Netherlands and Italy and it is this. From January 11th.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

For all the machinations that have gone on Italy has so far been immune from the suggested cure seen so often elsewhere which is to make the banks mortgage assets look stronger via higher house prices. How very Italian! Still the winners here are Italian first time buyers if they can get a mortgage.

Last week Bank of Italy Deputy Governor Panetta gave a speech which in one way suggested he must know some incredibly pessimistic people.

During the financial crisis, Italy’s banking system proved much more resilient than expected by many observers.

But intriguingly he does agree with me that if the buyers of bad loans are getting a good deal this must weaken and not strengthen the banks?

A generalized sale of NPLs on the market would imply a large transfer of resources from banks to buyers.

No wonder Diamond Bob is on the case! Also this is yet again rather familiar.

While the secondary market for NPLs is showing signs of rapid growth, it is still opaque and relatively oligopolistic.

And?

Simultaneous, blanket sales would further depress
market prices, magnifying the gap between the book and market values of NPLs. The result
for banks would be significant losses and reduced capital. This could have unintended effects
on individual banks as well as macroeconomic consequences through a contraction in credit
supply in countries where high NPL stocks are a concern for several banks.

7 thoughts on “What is going on with the banks of Italy?”

Ray Dalio’s Bridgewater has a large short position(recently tripling its size) against many european countries($22bn), including Italian banks, but it may be part of a hedging strategy to balance longs elsewhere in its portfolio.

Bridgewater isn’t really known for a stockpicking strategy rather taking positions on macro events so it’s probably taking a view on the outcome of the general elections not being positive for the Italian banks.

Cheers for the link and it is an interesting move selling Unicredit for example which has been in favour. But of course those sort of shares are ones you can make money on in terms of size. For a fund that size it may not be worth their time to sell Monte Paschi.

Of course it could be a hedge in that they are long Italian shares but want to cover off some risks.

So far Italy has mostly avoided bailouts which has created a collection of zombies. We have seen shareholders hit by rights issues and then price collapses and of course bonds plummet. It has been a grim game for investors and the private bailout fund Atlante. Quite why people have done it is a curious question?

Hi Shaun, please do a piece after the sunday election as well. We all know the Italian banks are bust dont we? Quite why Italian 10 Y bonds pay 2.4% compared to US treasurys.at 2.9% can only be attributed to the Dragi put. However with the new US treasury capitain we can see continuing and excruciating pressure on the Euro-area nay Sterling returns. I never expected true market pressure to tell on these crony marketplaces but tensions must be rising now.

Bust seems to be a flexible term where the Italian banks are involved at least officially. As to the bond yields that is easy as the ECB has bought another 3.4 billion Euros of Italian government bonds ( BTPs) last week meaning it now has some 330.1 billion or around 15% of the national debt. Along the way it has allowed the banks who were large holders of BTPs to take profits

Shaun, thanks for confirming what I suspected, ECB has floated the banks on printed money. I did not know that the banks were given profits too as well by the transaction. Outrageous, when will the falsehood end…. maybe with Brexit and Jerome’s actions.